Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson both acknowledged problems in the U.S. economy Thursday, but both said they believe the nation will avoid falling into recession.

However, the two added at a hearing before the Senate Banking Committee that official 2008 growth forecasts made late last year by the central bank and the president's Council of Economic Advisors are likely to be lowered in the coming months.

The Fed is currently predicting 1.8% growth for this year but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate was for the economy to grow by 2.7% in 2008.

In their prepared testimony, the head of the central bank and the Bush administration's point man on the economy said steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," said Bernanke in his opening statement, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.

But Bernanke conceded that banks are getting tighter in their lending standards, the housing and home building markets are likely to weaken further and the labor market may be softening.

"More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth," he said.

The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.

Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic readings justify it.

"The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.